Developing purposeful organisations

Networks and employee ownership: The future of the corporation

I believe that the draw towards democracy in organisations will prove to be just as irresistible as the draw to freedom and democracy in dictator-led countries. Like an Arab Spring at work. Why? Because I believe that humans have a fundamental desire to be set free. Freedom unlocks our potential making individuals happier and organisations perform better.

I think that the evolution of organisational democracy will lead to two super-species which will dominate the business world.

The first type of organisation, which I touched on previously, doesn’t even have a single entity. It will be a loose connection of individuals – a network – that creates connections and works together on projects. In a network there is no hierarchy, but you still have very clear roles, responsibilities and accountability in order to get a job done. These networks will make heavy use of technology. For example LinkedIn to find new connections and keep your network of collaborators alive; Etsy.com to organise the means of production; group collaboration tools like podio.com to communicate and manage the work; and telepresence to help alleviate the need for physical proximity.

The advantages of networks are enormous. You can put together the very best team for each project, instead of being forced to use the team that you happen to employ – a dream team for each and every assignment. They can also be highly efficient too because you don’t have a huge amount of company overhead – both financial and bureaucratic getting in the way of the actual work.

For individuals, they can have the ultimate personal freedom of deciding what they work on and taking breaks between projects whenever they like. Rewards are much more directly shared, with everyone on the team benefiting directly from their work. Performance is reviewed by peers not by a boss and success will speak for itself: Do a good job and you will be more sought after for future projects. You will be able to pick and choose the most interesting projects to work on, and your rewards will increase. No political struggles for a promotion or a pay rise. The ultimate meritocracy.

In the future I think we will be surprised at the size and scope of what informal networks, outside of traditional corporate structures are able to achieve.

But what about businesses that require more capital investment such as expensive machinery, and where the work is more ongoing rather than project based? Networks my not be ideally suited in these cases (although I wouldn’t rule out what a smart group of networked individuals might be able to pull off.) I do think though that networks won’t completely replace larger corporations altogether, but these corporations might look radically different to the ones we see today.

I believe that the future of the corporation is employee ownership. It’s not a new idea, and it’s one that has already proven to be a more productive, innovative, faster moving vehicle for long-term success. For example, see John Lewis (most successful retailer in the UK), consultants Arup (leading engineers of projects like the Bird’s Nest stadium in Beijing) or supermarket chain Publix (winner of the best customer service award in the US every year since 1995.)

Despite their undoubted success, when it comes to large companies, the employee owned variety are still a very small minority in an economy dominated by large publicly listed companies. I believe it’s inevitable that this will change – the free market will force the issue.

Employee-owned companies perform better because unlike listed companies there is no pressure for short-term financial results from the markets at the expense of building long-term value. Shareholder interests are not put before employees because they’re one and the same. It’s hard to have a more engaged workforce than one that actually owns the business, and that leads to high productivity, faster innovation, better products and services and happy customers. All of this leads to better performance in traditional terms like profit and capital gain.

Employee ownership is rarely considered as an exit option for entrepreneurs starting businesses who usually opt for a trade sale or IPO but I believe this will change over time. Many economists and business advisors still shun employee ownership based on incorrect assertions in the face of the evidence. It’s hard, although not impossible right now to fund employee buy-outs (we looked into it at NixonMcInnes.) I believe that this will change as faith in public companies and the stock market declines and employee-owned companies continue to thrive.

Within employee-owned companies, the structure will look very different to traditional corporations. Power is completely subverted with the most senior executives accountable to the employees instead of external shareholders and analysts who pass power down via the directors and managers.

We may also see organisations that internally look and function more like the loose networked model. They have all of the freedoms to self organise, but the resources of a larger corporation to call upon. Just look at software company Valve who already work in this way and are enjoying enormous success.

I believe that we are set to see a bright future as the short-term profit dominated world is gradually replaced by work with people at its centre.

7 thoughts on “Networks and employee ownership: The future of the corporation”

You’ve highlighted two major issues already:
– The networked organisation works best when dealing with intangibles, e.g. intellectual property, and will confront obstacles when tangibles, e.g. factories, heavy machinery, etc., are involved.
– The employee-owned organisation, as a start-up, will confront enormous difficulty accessing capital necessary to get off the ground (there will rarely be a Mr John Lewis around who will philantropically give the necessary capital to the employees, sadly).

You also built in an assumption that the individuals involved within a networked organisation will be fairly/equitably rewarded for their contribution; who will be making the decision about what is a fair/equitable reward – obviously not the contributor? How could one insure that a system exists which places a fair/equitable valuation on individual contributions where this has not been established in advance of the contributor commencing his/her contribution?

I’d love the democratic organisation concept to work but, as you seem to already recognise, there are significant obstructions/difficulties to be overcome.

If I think of any useful ideas/contributions I’ll forward them to you. I’m out of the commercial organisational structure now and have no real desire to get functionally involved again !

In the networked model, the contributors would work together on a budget which includes their individual rewards. It wouldn’t be in anyone individual’s interests to price themselves out of work because it’s a very free, open market.

Access to start-up capital for employee owned companies is a definitely a problem today. The best solution I have heard was with the Mondragon co-operatives in Spain. They solved the problem by starting their own bank! They attracted money from many savers who liked the fact that their money would stay in the local economy, creating new businesses and work that benefited the people. And guess what, the supposedly ‘risky’ loans that were used to fund employee-owned companies tended to get paid back and the bank was a success, and also survived the economic crisis well. This seems to show that the lack of finance is based on myths about employee ownership rather than fact.

Not sure what the solution is in the UK. There is a bank called Baxendales which specialises in finance for employee-owned companies but I don’t think there’s much competition in the space because most lenders seem to be prejudiced. I wonder whether the co-op bank is any better – you’d hope so! – will have to look into that. Or maybe start my own bank one day.

Also agree that people like Spedan Lewis who effectively gifted the company to the employees are a rare breed indeed. I have some ideas about this which I’ll save for a future blog post.

Easy Nixon. I was having a chat with some people I know who are connected to my local John Lewis and they are not as happy with the organisation as the shared ownership model would imply. I think the issue there is the lack of transparency for the business and the lack of trickle down to the guys on the floor. I guess you are going to have grumpy folk wherever you work (unless you recruit properly…) but the key issue seems to be that, whilst it’s all well and good that each individual has a stake in the business, the ‘say’ that they get is non-existant or, at the very least, considered lip-service at best. The examples given included having a staff survey every year (good thing) but then no communication of the common threads or the ability to see the results in full (only the results that ‘top brass’ want to discuss) which is why I think the issue is transparency.

That said, I know folk that have worked for JLP and say it’s a fab organisation… However, once again, I think it proves how difficult getting true organisational democracy into larger organisations will prove to be.

I have also wondered about how to get public sector organisations into democratic working when you don’t have the scope to decide what it is you can do as an entity (I don’t want to call it a business). I am specifically thinking about local authorities who are answerable both to higher levels of government and are antiquated (at best) in their thinking. Just a process driven entity. I’d be interested in your thoughts on that one.

Democracy and employee ownership certainly aren’t a panacea. Same is true in a democratic country. We have people out on the streets protesting against the government and people walking out of work and striking. It would be better if people didn’t feel the need to protest or strike but they are signs of a healthy, democratic, free country. And of course the people have the power to throw out the leadership in elections.

In democratic companies dissent is also good. I’m sure that at John Lewis some people are unhappy. But at least they have a voice and a chance to vote out the senior management and change things. The concept of ‘top brass’ is very different when they are appointed by the employees, not by external shareholders. From what you describe, perhaps there are some improvements to be made in the specific implementations of democracy (for example, increasing transparency) but the problem isn’t democracy itself. The power structure is completely inverse to a publlc company where shareholders have all of the power. And in spite of any dissatisfaction, John Lewis is hugely profitable and that benefits everyone working there. So it’s not perfect, but when the alternative is having no real power and the rewards being generated for shareholders then it’s got to be better.

Not sure about the public sector – not really my field, but in a sense democracy should make even more sense there since the entire purpose of the organisations is to benefit society, so giving more power to people should be a good thing.

At Baxi Partnership, we work with a number of companies that are making the move to employee ownership and it doesn’t require the exiting owner to be a philanthropist. Whilst external funding is currently tight there are specialist lenders such as ourselves and the Industrial and Common Ownership Fund who can provide this. Most of the recent transitions that I have worked on have however been vendor financed with the exiting owners being happy to wait for their capital over an extended period. The employees therefore “buy” the business from future profits.
Interestingly we are also receiving an increaing number of enquiries from business owners who see employee ownership as a growth strategy. For example Accord ESL, a specialist oil consultancy.